The South Carolina tribe wants to be like Delaware but for crypto trades

Written by Colin Wood

About two-thirds of Fortune 500 companies are incorporated in Delaware, where they enjoy tax benefits and a special court to resolve business disputes. But a tiny Native American tribe in South Carolina hopes to usurp Delaware’s status as the nation’s pre-eminent tax haven, and it starts with crypto.

The Catawba Indian Nation, a group of about 3,500 people on land 30 miles south of Charlotte, North Carolina, released draft regulations on stablecoins, digital currencies intended to bring financial stability to an unpredictable cryptocurrency market, last month. By borrowing bank codes and tweaking popular regulatory frameworks used by other states — including North Dakota, South Dakota, and Wyoming — the tribe aims to become the place people go when they start a crypto business want to found.

The project will be operated out of the Catawba Digital Economic Zone, a legal entity formed last February that CEO Joe McKinney says has the same sovereignty and legal reach as any state. McKinney said he developed the zone’s legal framework over a period of several years, calling the launch a milestone for a project with great “profit potential.”

McKinney hopes the zone will eventually replace Delaware as a place to start companies looking for tax breaks remotely, but it starts with “Web3,” a lively umbrella term that encompasses a range of crypto-related technologies includes: blockchain, non-fungible tokens, and other decentralized economic and legal endeavors. This includes stablecoins that seek to peg their value to traditional currencies and commodities such as the US dollar or gold.

“There is no clarity about stablecoins in the United States,” McKinney said. “It’s not even an example of over- or under-regulation. There is a lack of enlightenment. A lot of what we see in crypto is just plain scams that regulation would be particularly helpful for. But I think a lot of what is happening in the crypto space could be helpful in providing clarification from a consumer protection perspective while being careful not to stall innovation.”

The Catawba Digital Zone, McKinney said, is the place to provide that clarification. Because the zone has many of the same legal powers of larger government agencies but is “more flexible,” it can better respond to changes in the industry, he said.

“Delaware doesn’t have any specific rules or regulations for Web3,” he said. “They just have good jurisprudence and the courts add principles to them on an ad hoc basis. That could work, but gives the companies based there less security.”

McKinney also touted the zone’s digital-first culture: it doesn’t have the physical paperwork that companies have to file elsewhere. He said the zone will begin its online application for LLC status sometime this week, with other services to follow.

In addition to its recent stablecoin draft regulation, the Zone also recently submitted for comment a regulation on Decentralized Autonomous Organizations, or DAOs, a bottom-up legal structure popular with the crypto crowd. Zone regulation would allow DAOs to be recognized similarly to more common corporate organizations such as LLCs.

“The reason this is helpful is because DAOs as they are now are essential [Discord channels] with an associated public blockchain,” McKinney said. “From a legal perspective, that means they often operate as a general partnership, and that’s really bad from a liability perspective.”

McKinney acknowledged that fraud is rampant in the crypto space and that shenanigans like the recent collapse of cryptocurrency exchange FTX — which he dubbed a “Ponzi scheme” — can be largely avoided with the right rules. Regulatory bodies, regulations and procedures used in traditional banking can provide guard rails to protect consumers.

“If you want a stablecoin, it has to be with a regulated entity, you have to have one-to-one support, and you have to have the same reporting that a regular financial institution would have,” he said.

Federal lawmakers and regulators are reacting to the FTX debacle. But even in the limelight, they’re not moving as fast as the Catawba Digital Economic Zone, McKinney said.

“Organizations at the state level are really important right now,” he said. “Congress, after all this, is moving too slowly even on these issues. Congress will be a long way from having a holistic blockchain or stablecoin bill, but things need to happen. States and country-level jurisdictions will fill the gap.”